Transcript Outsourcing and Offshoring in the Semiconductor Industry

Sloan 2004 Annual Conference
Outsourcing and Offshoring in the
Semiconductor Industry
David A. Hodges
Robert C. Leachman
Competitive Semiconductor Manufacturing Program
UC Berkeley
Sloan Industry Centers Annual Conference
Atlanta, GA April 19-21, 2004
Sloan 2004 Annual Conference
U.S. Integrated Device Manufacturers
(e.g. Texas Inst., Motorola, Intel, …)
Labor-intensive chip assembly work mostly
off-shored since the 1960s
Initially, plants served just one company
More recently, independent assemblers and
testing firms are serving multiple customers
IBM automated in the 1960s
Automation of assembly and testing now
spreading industry-wide and world-wide
Sloan 2004 Annual Conference
U.S. IDMs, 1960-1990
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Capital-intensive wafer fabs were off-shored
selectively: important aid market access
Cost of direct labor not a significant factor
US ownership, international professional staff
Hazards: weak infrastructure, long supply
lines, business and political climate
Early examples: Texas Instruments (Japan),
Analog Devices (Ireland), Intel (Israel)
Sloan 2004 Annual Conference
U.S. IDMs, 1960-1990
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Skills-intensive process development and
product design mostly remained in the US
Firms sought advantages from proprietary
technologies
Few skilled professionals available abroad
Some exceptions: Chip design centers in
England (TI), Israel (Intel); typically devoted to
specific products for worldwide markets
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Sales, marketing, customer support efforts
carried on world-wide
Sloan 2004 Annual Conference
Changing business models:
IDMs forced to become specialists
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Intel, AMD: microprocessors
Samsung, NEC, Micron, Infineon: memory
Texas Inst., STM: chips for cell phones
These are standard products, MM units;
same designs purchased by many competing
original equipment manufacturers (OEMs)
Above categories represent about ½ of total
worldwide semiconductor production
What about the other half?
Sloan 2004 Annual Conference
Factors leading to “foundries”
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Competitive modern wafer fabs cost $2-4B
 employ ~ 1000 people (total for 7 x 24 operation)
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Annual revenues > ½ fab cost for profitability
 Worldwide standardization of mfg. process
 Innovative design firms require only a fraction of
one fab’s capacity
 Vastly different management skills: design vs. fab
 IDMs rarely succeed in serving fabless firms
 Foundries were established to serve this need
 Leadership of Morris Chang!
Sloan 2004 Annual Conference
Fabless-foundry business model
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Fabless firms define, design, & market chips
 small investment, quick response
 $300-500K revenue/employee
 ~50,000 well-paid U.S. jobs; ~13,000 ROW
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Asian foundries fabricate chips for many firms
 huge investments; fixed costs ~75% of total
 ~15,000 factory jobs, well-paid by local scales
 highly automated for tight process control
 short production cycle
 timely intro of new technology generations
 excellent customer service
 some niche specialists with old technology
Sloan 2004 Annual Conference
Outsourcing, Offshoring?
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Fabless design centered in the U.S.
MS, PhD grads of top U.S. universities
U.S. is #1 (78% of ‘03 revenues)
Taiwan is #2 (11% of ’03 revenues)
Equivalent design skills very rare elsewhere
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Most silicon foundries are in Asia
 Many process development jobs in Asia
Many grads of top US universities
Weak U.S. domestic investment (except Intel)
Sloan 2004 Annual Conference
“Food chain” for semic. industry
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Semiconductor production equipment & raw
materials are supplied mainly from U.S.,
Japan, and Europe
 U.S. leads in key areas:
MS & PhD education
Computer-aided design for semiconductors
University-industry cooperation
Climate for innovation
Market for advanced technology
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Government support is strongest in Asia
Sloan 2004 Annual Conference
Factors influencing location for
manufacturing investments
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Trophy value of semiconductor fabs
(Think about the steel industry in the 1960s)
 Trophy sought by gov’ts worldwide: tax incentives!
 China is the current leader in incentives
 Most capital comes from outside PRC
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Fading concerns about investment risks
Weaker controls on U.S. equipment export
Commodity status of manufacturing technology
Return of expatriates; spread of higher education
Protected IP less important than know-how
Improving infrastructure in China, other nations
Sloan 2004 Annual Conference
Chinese competition for foundry business
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Semiconductor Manufacturing Int’l Corp. (SMIC)
 largest, most advanced Chinese foundry
 founded in 2002; 3 8” fabs in Shanghai
 purchased Motorola’s 8” Tianjin facility
 12” fab in Beijing under construction
 3/17/04: $1.8B IPO in HK & NY; -12% as of 4/6/04
U.S. filed WTO complaint re: China’s lower VAT for
locally designed or manufactured semiconductors
 China remains far behind in chip design capability
 China establishes unique domestic standard for
cellular telephony; Chinese partners required
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Sloan 2004 Annual Conference
2003 Foundry revenue leaders
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1. TSMC (Taiwan)
 2. UMC (Taiwan)
 3. Chartered (Singapore)
 4. IBM (U.S.-IDM)
 5. NEC (Japan-IDM)
 6. SMIC (China)
 7. Hynix (Korea-IDM)
 8. DongbuAnam (Korea)
 9. Jazz (U.S. ex-Rockwell)
 10. HHNEC (China)
 11. SSMC (Singapore)
 12. X Fab (E. Germany)
$5.9 billion
2.7
.73
.56
.43
.37
.34
.33
.19
.17
.16
.13
+ 26%
+ 27%
+ 49%
- 27%
+ 33%
+630%
+ 39%
+ 27%
+ 16%
+ 13%
+ 82%
+ 27%
Sloan 2004 Annual Conference
Survival strategies of U.S. IDMs
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Intel: heavy investments; try new markets
Texas Inst: limit investments + use foundries
IBM: partnered with Chartered, Infineon
AMD: more German incentives in Dresden
Micron: innovation; more cost reductions
Motorola: divesting semiconductor business
National: product focus; use foundries
Analog Devices: limit investments + foundries
Sloan 2004 Annual Conference
Conclusions for semiconductor industry
It’s a fully globalized industry
 Microprocessors: Intel unchallenged
 Memory is a commodity; Samsung leads by far
 IDM business model is dead for other products
 U.S. leads in innovative chip design
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 U.S. unchallenged in design software
 design & software skills are bound to spread!
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Asia leads in foundry manufacturing
 U.S. is not a serious competitor; poor ROI
 TSMC, UMC are likely to remain leaders
 Overcapacity looms; SMIC payoff is uncertain